Myth Exposed- Economy Too Good for Significant Housing Slowdown

We’ve heard it time and again- our strong and growing economy is going to protect us from a serious downturn in the housing market.Â We’ve been told that given the strong economy and high levels of consumer confidence, what we are seeing is a “soft landing” or a pause in the market.

David Lereah, Chief Economist for the National Association of Realtors, indicates that even “boom” areas of the country are in for no worse than a soft landing.Â “That outcome makes sense, since the rapid appreciation these areas saw during the boom years wasn’t without foundation; the areas were buoyed by strong economic growth too.”

“Its only when rapid home price appreciation isn’t accompanied by a growing economy- like what happened in Boston in the 1990s- that you see market bubbles bursting.”

David Seiders, Chief Economist for the National Association of Homebuilders said, “We’re still projecting a below trend GDP growth- a bit above 3% in the second half of this year and 2007, and we continue to view this pattern as mid-cycle correction THAT WILL EXTEND THE ECONOMIC EXTENSION (Emphasis mine) for at least several more years.”

“The NAHB’s national housing forecast shows a moderate and orderly cooling down process that began in late last year and extends into the middle of 2007.Â In this regard, the forecast currently shows a 14% decline in total housing starts from the third quarter of 2005 to the third quarter of 2007.” Seiters continued.

“The Dow Jones index sank more than 80 points, wiping out its gains for the year after worrying inflation figures.

Meanwhile, Japanese stocks saw their biggest one-day fall in two years and European stocks hit six-and-a-half month lows.

Commodity prices also fell with gold witnessing biggest drop in 25 years.

Gold prices dropped below the $600 mark, falling as low as $565.50 during the day, while copper prices stood 35% off peaks of $4.04 hit just last month.

Elsewhere, crude prices slid $1.80 in the US to close at three week lows of $68.56 a barrel.

Earlier, the FTSE 100, France’s Cac and the German Dax index all closed about 2% lower, hours after Japan’s Nikkei index closed down 4.1%.

The sell-off did little to calm jittery US investors, who led Wall Street on a roller coaster ride ahead of official data showing inflation had risen more than expected.”

Analysts aren’t seeing an end to volatility anytime soon.Â

The global sell-off …Â may only be just starting, according to JPMorgan Chase & Co.’s global equity strategist Abhijit Chakrabortti.

“This is nothing compared with what we may see late in the summer and early October — once slower growth finally sinks in and expectations for higher benchmark rates, at 6 percent or even more, come out,” Chakrabortti told the Reuters Investment Outlook Summit in New York.

Today’s market losses were virtually across the board, with very few bright spots. While we will undoubtedly have some up days in US markets in the next few months, the trend is not looking good.Â It’s looking less likely the the US economy will have sufficient strength to protect real estate from a hard, bumpy landing.